Notes - Startup Boards

December 11, 2024

Chapter 1: Introduction

Initial Perception of the Boardroom

The traditional view of a boardroom is often one of formality and complexity, with important people making big decisions. However, for startups, a board is typically a small group dedicated to helping build the company.

Brad Feld's Experience with Startup Boards

Brad Feld's experience serving on numerous startup boards has ranged from great to terrible. Boards can be helpful and supportive during smooth periods but may hinder or help when challenges arise. The author emphasizes that this book will provide tools for creating and managing a successful board and address issues when things aren't working.

The Purpose of a Board

This chapter clarifies that the book's aim is to explain clearly how startup boards function and how they can be most effective. It uses plain language and humor to demystify board operations, discussing both best and worst practices.

Why Startups Need a Board

Entrepreneurs face a lonely and challenging journey, and boards can provide support by connecting them with investors and experienced individuals who have navigated similar challenges.

Investors' Role and "Adult Supervision"

Investors, as board members, can contribute by providing oversight and "adding value". The authors reject the term "adult supervision" as it is demeaning to the entrepreneur and the company.

The Board as an Extension of the Team

Similar to building a management team, entrepreneurs should carefully select board members who possess the necessary skills and experience. An effective board member acts as a coach and mentor, pushing for growth and providing support without taking over.

Patience in Finding the Right Investors

Founders often feel pressure to accept funding quickly, but patience is crucial to ensure the right personalities on the board, ultimately making the CEO's journey easier.

Accountability and Value Creation

The board acts as a strategic planning department, guiding and engaging with the CEO while expecting accountability and results. Boards, particularly investor-heavy ones, can act against a CEO who neglects the goal of building a valuable business.

Who This Book Is For

The target audience includes:

Inclusiveness in Terminology

The book aims for inclusiveness in terminology, using entrepreneur and founder interchangeably.

Definitions for Key Roles

The chapter provides clear definitions for terms such as CEO, angel investor, VC, and board to ensure clarity and prevent misunderstandings.

Collaboration and Continued Learning

The book emphasizes collaboration and incorporates advice from a range of experienced individuals.

The Importance of Creative Destruction

The authors highlight the importance of "creative destruction," a term coined by economist Joseph Schumpeter, which describes the forces of entrepreneurship and innovation.

The Value of a "Beginner's Mind"

Even experienced entrepreneurs are encouraged to approach the book with a "beginner's mind" to facilitate learning new insights.

Chapter 2: What Is a Board?

This chapter defines corporate governance and explains both the formal and informal duties of a board of directors. The chapter begins by defining a board of directors as having a set of formal duties known as corporate governance, including legal concepts like the duty of care and duty of loyalty and committees such as the audit, compensation, and nominating committees. Although startup boards need to be flexible, the authors suggest it is helpful to understand the formal requirements.

Value Creation, Accountability, and Transparency

The authors explain one of a board's primary roles is ensuring all shareholder interests are being considered. As companies mature, outside board members are added to the board, creating a collective group responsible for balancing the interests of all shareholders. In addition to working to maximize the value of economic outcomes, boards are responsible for accountability and transparency. CEOs periodically present to the board on the progress of the company and provide an account of business operations. The board is then responsible for establishing appropriate procedures, setting milestones, and assessing performance. Transparency ensures the CEO and the board make decisions based on factual information, using sound judgment to serve the interests of all shareholders.

Legal Duties of a Board Member

The legal duties of a board member are rooted in the duty of care and the duty of loyalty. The authors describe the duty of care as requiring board members to make decisions in good faith using the information available to them at the time. This means board members are expected to act in the best interests of the company and cannot be willfully negligent or reckless in their decision-making. The duty of loyalty, on the other hand, requires board members to put the company’s interests before their own or the interests of any other party. The sources list examples of other duties that fall under the duty of loyalty:

Chair or Lead Director

The sources state there is a legal distinction between a board chair and a lead director, with most private companies having a board chair who is also the CEO. Public companies, on the other hand, usually separate these roles and elect a lead director who is an independent director. Both roles share some common functions, including managing board meetings and proactively communicating with the CEO. A good board chair or lead director should possess the following characteristics:

While both roles focus on maintaining a positive and productive board environment, the role of a lead director goes a step further. Lead directors can ensure balance in the boardroom, ensuring important constituencies and perspectives are represented, and work to prevent noncore agendas or perspectives from obscuring discussions. Lead directors should be active in coaching both the CEO and directors to get topics on the table for consideration in a constructive context. Finally, the sources explain the role of the lead director in board governance, helping to ensure the board has an effective means of calibrating its performance as a team as well as assessing the contributions of various board members, including board committees. This includes an assessment of the lead director by other board members.

The Role of Board Committees

The sources state early-stage companies have smaller boards and may not have standing committees, with the entire board handling board business. As the company matures, however, different committees may be created to handle specific aspects of the business. The sources give examples of common board committees:

Other Functions of a Board

The sources list other informal but vital functions a board serves, including:

To help ensure alignment between the CEO and the board around these informal functions, the sources suggest the CEO consider what reporting requirements are formally defined in the company's term sheet.

Chapter 3: Creating Your Board

This chapter emphasizes the strategic thought process involved in forming a startup board, going beyond simply filling seats. It highlights the dual importance of both technical and emotional intelligence in a board’s composition. The chapter underscores the significance of experience and trust, emphasizing that a board should function as an extension of the startup team rather than just a supervisory entity.

The Board’s Technical Priorities: Economics and Control

The sources begin this section by explaining how economics and control are intertwined in the board’s structure. The sources note how various legal documents, including shareholder agreements and term sheets, define the control different stakeholders have within the company.

The chapter goes on to say how control within a startup operates on multiple levels.

Specific areas where board approval is typically required include:

Table 3.1 provides a clear outline of the key responsibilities of the CEO and the board. This table, sourced from Fred Wilson’s blog post "What a CEO Does,” reinforces the notion that while the CEO drives day-to-day operations, the board provides oversight and strategic direction.

The Board’s Emotional Priorities: Trust, Judgment, and Transparency

While the technical aspects are crucial, the chapter stresses that the emotional dynamics within the board are equally important. The chapter identifies trust, judgment, and transparency as the core emotional priorities, underlining that trust is paramount for a successful board.

Without trust, a board cannot function effectively, even if its members possess impressive skills and experience. Building trust takes time and consistent effort. It requires open communication, honesty, and a shared commitment to the company's success.

Judgment is another critical element. The chapter says board members should make well-informed decisions that prioritize the company's best interests. This involves experience, thoughtful deliberation, and the ability to balance different perspectives and potential risks.

Transparency ensures that all decisions are based on accurate and complete information, fostering a culture of openness and accountability.

Composition of the Board

The composition of the board, which encompasses the skills and experience of each member, should be thoughtfully planned. This composition should adapt as the company grows, reflecting the evolving needs of the business. Table 3.2 illustrates how the role of board members shifts across different stages of a company's development.

Early-stage startups may benefit from board members with:

As companies mature, the focus often shifts to:

The sources then provide insights on the traits of a valuable board member from Matt Blumberg, CEO of Return Path. Blumberg emphasizes the importance of commitment, preparedness, open communication, independent thinking, resourcefulness, and a balance of strategic engagement with operational distance.

Identifying Great Board Members

When considering potential board members, the sources recommend prioritizing individuals who meet the criteria outlined in Table 4.1, which evaluates characteristics across integrity, intellectual acuity, and emotional intelligence. This table provides a framework for assessing a candidate’s potential fit and contribution to the board.

The sources elaborate on the importance of integrity as a foundational trait, referencing a quote by Warren Buffett: "In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you."

The sources provide a framework for evaluating board members, classifying them into three categories:

Scott Weiss, a partner at Andreessen Horowitz, highlights the significance of seeking board members who will push the company to think bigger, offer sharp insights, and be responsive and proactive in their contributions.

The VC Firm Matters as Much as the Person

The sources stress the point that the quality of the VC firm itself should be evaluated as rigorously as the individual board member's qualifications. The firm's financial stability, track record, and the continuity of its partners are key factors that can impact its ability to support a startup.

Key areas to consider about a VC firm include:

Greg Gottesman of Madrona Venture Group advises startups to prioritize VC board members who are not only prestigious but also have the time and availability to dedicate to the company’s needs.

Independent Board Members

The chapter then discusses the unique role of independent board members, who represent neither the investors nor the founders. Their unbiased perspective and concern for the company as a whole can be invaluable. An ideal board composition will strike a balance between investor representatives, founder representatives, and at least one independent member.

The sources highlight several benefits of having independent board members:

The Role of an Executive Chairman

The chapter explores the role of an executive chairman, a position that can bridge the gap between the board and management, particularly during periods of transition or growth.

Reid Hoffman, co-founder of LinkedIn, offers insights on his experience as executive chairman, explaining how the role can be tailored to a company’s specific needs. Hoffman highlights the importance of establishing clear responsibilities and communication channels between the executive chairman and the CEO.

Board Observers

The chapter also clarifies the function of board observers, individuals who attend board meetings but don’t have voting rights. They can provide valuable input and insights without the formal responsibilities of a director.

Key points about board observers:

The sources emphasize that while titles can be formal, the value of a board observer ultimately comes from their willingness to actively contribute to the company's success.

Your Lawyer Should…

This section underscores the vital role of legal counsel in board matters, advising startups to engage an experienced lawyer specializing in startup law. The lawyer acts as a guide and protector, ensuring compliance with legal requirements and safeguarding the company's interests.

The chapter outlines key areas where a startup lawyer should contribute:

Eric Jensen of Cooley LLP emphasizes that the focus should be on ensuring proper legal procedures and accurate record-keeping rather than simply minimizing legal fees.

Gender Diversity Matter?

This section advocates for gender diversity on startup boards, challenging the notion that women lack the necessary experience. The sources emphasize the benefits of diverse perspectives and the valuable contributions that women can bring to the boardroom.

Jim Dai, CEO of CalmSee, shares his positive experiences working with women in leadership roles, highlighting their competence and ability to contribute meaningfully.

Mike Smalls, CEO of Hoopla, underscores that gender balance in the boardroom reflects well on the company and contributes to a more balanced and effective board dynamic.

Being Rich and King

This section, while brief, cautions against prioritizing wealth or perceived status when choosing board members. The chapter emphasizes that the true value of a board member lies in their ability to contribute meaningfully to the company's success through their skills, experience, and network. A board member's wealth or social standing is secondary to their ability to add genuine value to the startup.

Chapter 4: Recruiting Board Members

This chapter of Startup Boards: Getting the Most Out of Your Board of Directors focuses on the importance of recruiting the right board members and provides a structured approach to identifying, evaluating, and onboarding them. The chapter emphasizes that board members can have a significant impact, positive or negative, on a company’s trajectory.

The Value of Good Board Members

Aligning the right board members is critical to a startup's success. The authors illustrate this concept through two contrasting examples. The first highlights the positive influence of Vinod Khosla, a managing director at Khosla Ventures, on Excite, a company Ryan McIntyre co-founded. Khosla's advice to “think big” encouraged Excite’s founders to reject an acquisition offer and instead pursue ambitious growth, ultimately leading to a successful IPO and a merger valued at $6.7 billion.

Conversely, the authors present a cautionary tale about a board member whose lack of transparency and manipulative behavior undermined the CEO and ultimately led to the company's demise. These examples underscore the importance of carefully selecting board members who will act with integrity, provide constructive guidance, and support the company’s long-term vision.

Characteristics and Skills of a Board Member

The chapter outlines key characteristics to look for when recruiting board members.

Integrity

Integrity should be non-negotiable. The authors emphasize seeking individuals who are honest, transparent, and accountable for their actions. Quoting Warren Buffet, they underscore that integrity is paramount, as intelligence and energy without integrity can be detrimental.

Intellectual Acuity

Board members should possess bold yet measured intellectual acuity. They should challenge the CEO's thinking appropriately, demonstrate a deep understanding of market dynamics, and be able to synthesize information from various sources to draw meaningful conclusions.

Emotional Quotient

The ideal board member has a high emotional quotient, providing guidance and mentorship while maintaining discipline. They should foster a respectful and collaborative environment and demonstrate a genuine commitment to the company's long-term success.

Types of Board Members

The chapter highlights three types of board member personalities, as defined by Jeffrey Bussgang, a general partner at Flybridge Capital Partners: the domain expert, the cheerleader, and the truth-teller. Each type brings unique strengths to the board.

Recruiting Board Members

The chapter offers a structured approach to recruiting board members.

Preparation and Pitch

Treat the board member recruitment process with the same rigor as hiring a senior executive. This includes:

Reference Checks

Thorough reference checks are essential. The authors suggest focusing on questions that reveal the candidate's ability to add value, handle challenging situations, and any potential shortcomings in the context of a board role.

Onboarding

The chapter also highlights the importance of effectively onboarding new board members. This includes providing:

Chapter 5: The Formal Structure of the Board

The Formation and Evolution of a Startup Board

Upon a company's creation, a board is formed. The structure of this board often changes when the company undertakes financing, as this restructuring becomes part of the financing negotiation, typically addressed during the term sheet discussion. While the founders, investors, and CEO may agree on the financing terms, their perspectives on the company's evolution may diverge.

Figure 5.1 from the source illustrates two approaches to board formation: proactive and reactive. The proactive approach prioritizes values and considers minds over money, suggesting a thoughtful and strategic process.

Defining Documents: Articles of Incorporation and Bylaws

Two primary documents define a company upon its creation: the articles of incorporation and the bylaws, sometimes referred to as the operating agreement. The articles of incorporation, filed with the state government, act as the company's birth certificate, declaring its name, address, legal structure, and purpose. The bylaws outline the company's decision-making processes, chain of command, and governance structure, defining roles like the CEO, their election process, and responsibilities. Initially, the board of directors, typically comprising the founders, is also identified in the bylaws.

Impact of Financing on the Certificate of Incorporation

Financing agreements, particularly term sheets, usually specify the board's size and composition. The term sheet dictates the number of board members, their allocation between investors, founders, and independent members, and the board's operational dynamics.

An example from the source demonstrates language typically found in a term sheet: this language outlines the board configuration and operating procedures, including the number of members, their designation, meeting frequency, committee structure, the determination of the number of directors, and their election, qualification, and term of office.

Motivations and Dynamics of VC Involvement

Venture capitalists (VCs) often seek board seats to influence company direction and protect their investments, aiming to maximize returns for their limited partners (LPs). VC performance is assessed through cash-on-cash return and internal rate of return (IRR). Cash-on-cash return, a simple multiple of money returned to money invested, ignores the time factor. In contrast, IRR emphasizes time dependency, with quicker company sales yielding higher IRRs. VCs typically target a minimum annualized IRR of 20 percent, making time a crucial factor in their decision-making. This time sensitivity sometimes incentivizes VCs to push for a quick exit, potentially conflicting with the long-term vision of founders or CEOs.

Founders and CEOs should recognize that VC involvement comes with the expectation of working towards a liquidity event, primarily through an acquisition. Respecting this expectation forms part of the implicit agreement when accepting VC funding.

Chapter 6: Aligning Your Board

Motivation and Communication

Selecting the right board members is only the first step in building a successful board. Ensuring alignment on goals and setting appropriate expectations for communication is equally critical.

Aligning the Board: DNA Discovery

Nexaweb Technologies CEO, Chris Heidelberger, compares aligning a board to discovering the DNA of each member. While board members may share the common goal of company success, they need time and effort to understand each other's motivations and perspectives.

Aligning on Milestones and Expectations

To ensure everyone is on the same page, it's crucial to align on key milestones and the expected timeline. Asking board members about their expectations for achieving specific goals (e.g., reaching $1 million in revenue, building a sales force) can reveal misalignment and provide an opportunity to address it early.

Steve Blank's Checklist for Alignment

Steve Blank, author of The Startup Owner's Manual, stresses the importance of aligning investors, founders, and the team. He provides a checklist to ensure agreement on key aspects, such as business model, fundraising strategy, and equity splits.

Orienting New Board Members

Once new board members are recruited, it is important to provide them with a comprehensive orientation. This should include:

Elements of an Orientation Package

Matt Blumberg, CEO of Return Path, suggests including the following in a board orientation package:

Lessons from Experience

The sources provide examples of board misalignments and the importance of addressing them. For example, a CEO who focuses on seeking advice rather than presenting a clear direction can lead to confusion and unproductive discussions.

Framing Discussions Effectively

When presenting issues to the board, CEOs should focus on hypotheses, data-driven analysis, and clear requests. Avoiding open-ended questions and demonstrating thoughtful preparation will enhance board engagement and effectiveness.

Chapter 7: Is an Advisory Board Useful?

Should You Have an Advisory Board?

An advisory board can help startups navigate challenges such as:

An advisory board can offer guidance similar to a formal board, but there are differences between the two. Foundry Group managing director Brad Feld suggests adding a board member before you raise a VC round while Steve Blank suggests not adding a board member until after you raise a VC round. Ultimately, it is up to the founder to decide what advice they take in regards to forming a board.

Formal Board Member

Advisory Board Member

However, the sources note that advice from advisors can be harmful if it is taken without proper consideration.

Attributes of a Useful Advisory Board Member

Kauffman Foundation vice president Lesa Mitchell notes that founders should be highly selective when choosing advisors as “millionaires and super successful” people do not necessarily provide valuable advice. She suggests choosing advisors who have experience scaling companies or are C-level executives as they will likely have access to a helpful network.

Blackberry vice president T. A. McCann suggests identifying the skills your company needs to be successful and recruiting advisors who can fill those gaps.

Selecting Advisory Board Members

According to the sources, Steve Blank suggests recruiting five different kinds of advisory board members based on your company's needs:

  1. Technical: Offers product development advice.
  2. Business: Offers business strategy guidance.
  3. Customer: Offers direction on product features/value proposition.
  4. Industry: Brings domain expertise.
  5. Sales: Counsels on sales tactics and demand creation.

Challenges of Advisory Boards

Using the title “Advisory Board” can be problematic as it is often seen as a vanity metric that serves to inflate a company's image, rather than providing tangible benefits.

Chapter 8: The Actual Board Meeting

This chapter outlines the practical considerations of running an effective board meeting. It covers the structure of the board meeting, best practices for running the meeting, and considerations around meeting formats and attendees.

Creating an Annual Calendar

The Meeting Agenda

Sending Out the Board Package

Meeting Length

A Board Call Instead of a Meeting

Remote Attendees

Meeting Hygiene

Managing Interpersonal Dynamics

Including Your Team in the Board Meeting

The Executive Session

After the Meeting

Chapter 9: Motions and Votes

Formal Aspects of Board Meetings

While startup board meetings may not be overly formal, it's essential to incorporate and adhere to certain formal aspects. This includes:

Robert’s Rules of Order

Board meetings are guided by Robert's Rules of Order, a parliamentary procedure created by Brigadier General Henry Martyn Robert in 1876 to bring structure to meetings.

The Importance of the Agenda

The agenda, whether for a regular update meeting or a special meeting, should be predefined and distributed ahead of time. Examples of agenda items include officer reports, key business decisions, management matters, equity-related decisions, annual budgets, debt obligations, acquisition activity, committee reports, and announcements.

The Role of Legal Counsel at Meetings

Having your lawyer present during board meetings, even for early-stage companies, is crucial for ensuring procedures are correctly followed and records are accurately maintained. Lawyers often offer discounted rates for attending these meetings.

The Mechanics of Voting on Motions

Motions, or proposals for the board to act upon, are presented and decided upon according to the company's bylaws. The process typically involves:

  1. Presentation: A board member introduces a motion.
  2. Second: Another board member seconds the motion.
  3. Discussion: The board discusses the motion.
  4. Amendment: If needed, the motion is modified or amended.
  5. Vote: The board votes on the motion, with the outcome recorded by the secretary.

Importance of Accurate Minutes

The secretary's role includes recording minutes, which serve as legal documentation of board meeting proceedings, including resolutions and outcomes. Accurate and timely minutes are crucial for transparency, governance, legal and acquisition-related matters.

Handling Disagreement on Motions

Conflicts between board members are best resolved outside of board meetings. However, if a disagreement arises during a vote:

Addressing Formal Items at the Beginning

Brad Feld advocates addressing formal items at the beginning of the meeting for several reasons:

Pre-Meeting Lobbying for Major Decisions

Mark Suster advises CEOs to discuss and seek agreement on major decisions before the board meeting to avoid surprises and ensure a smoother process.

Creating Effective Minutes

Minutes should strike a balance between demonstrating board focus on relevant issues and avoiding excessive detail that could be used against the company in potential litigation. Key voting issues such as option issuance, financing rounds, litigation settlements, or company sales, should be carefully documented, while regular business matters can be recorded more concisely.

Importance of Unanimous Written Consent

Unanimous written consent is a valuable tool for streamlining board decision-making, allowing for quick action on non-controversial matters without the need for a formal meeting. This involves circulating a written resolution for all board members to sign, indicating their agreement.

Chapter 10: Legal Challenges When the Going Gets Tough

Minimizing Legal Challenges

Startups frequently encounter legal issues that can arise from various sources, such as investors, employees, customers, or competitors. To minimize potential legal problems, it's essential to:

Pragmatic or Idealistic?

When facing legal challenges, startups need to adopt a pragmatic approach while upholding ethical standards. This balance involves:

Chapter 11: Managing Ongoing Expectations

Board Member Expectations

Board members, particularly VCs who serve on multiple boards, have certain expectations regarding communication from CEOs. A successful CEO understands these expectations and manages them effectively.

CEO Authenticity and Self-Awareness

CEOs should be genuine and self-aware, avoiding the trap of trying to emulate a specific leadership style. The sources describe the most successful CEOs as those who possess a natural and sincere leadership style, coupled with a willingness to seek help when needed.

Open and Honest Communication

Transparency and honesty are crucial in building a strong relationship between the CEO and the board. The sources emphasize that the foundation of a successful board/CEO relationship is trust, which is best fostered by open communication.

Avoiding Board Management

The sources advise CEOs against trying to "manage" the board by controlling or manipulating the information shared. This behavior is easily recognized by board members and hinders the development of trust. Additionally, attempting to manage the board prevents CEOs from benefiting from the diverse expertise of their board members.

Thorough Preparation

CEOs are expected to be prepared for board meetings by creating a comprehensive board package and disseminating information in advance. They should also anticipate potential questions from board members, clearly communicate their needs, and encourage active board participation.

No Surprises

The sources emphasize the importance of avoiding surprises during board meetings. This means communicating critical information to the board before the meeting, whether through the board deck or direct communication.

Board Meetings as a Collective Forum

The sources stress the significance of having board meetings as a collective forum for discussion and decision-making. CEOs should avoid pre-meeting discussions with individual board members that could undermine the group dynamic.

Clear Requests for Assistance

CEOs are encouraged to clearly articulate their need for assistance from the board and make specific requests. Vague requests for help, especially those related to sales, are generally unhelpful and not the primary responsibility of the board.

Communication in Times of Adversity

The sources highlight the importance of communication during challenging periods. CEOs who communicate openly during difficult times build trust and credibility with the board. Seeking advice from board members one-on-one outside of board meetings is a good way to address challenges and demonstrate transparency.

Finding a Balance in Communication

The sources caution against over-communicating with the board. CEOs who constantly seek input on minor decisions can overwhelm board members and hinder their effectiveness. Conversely, excessive reliance on pre-meeting communication can prevent the board from functioning as a cohesive unit. The sources recommend finding a communication cadence that allows for transparency and board involvement without creating an overwhelming burden.

No New Information During Meetings

The sources stress that board meetings should not be the venue for sharing major surprises, whether positive or negative. Significant developments should be communicated to the board as they occur, allowing for informed responses and timely assistance.

Over-Communicating Bad News

The sources suggest over-communicating bad news as a tactic to manage board expectations. This approach can help mitigate negative reactions by ensuring the board is prepared for potentially challenging financial information. Transparency regarding negative developments, even when amplified, helps maintain trust and credibility.

The Board as a Resource for the CEO

The sources propose that CEOs should view the board as working for them, except in situations involving hiring or firing the CEO. While acknowledging that CEOs may not manage the board in the same way as their internal team, the sources emphasize the importance of managing the board as a valuable resource.

Expectations CEOs Should Have of the Board

The sources outline six key expectations CEOs should have of their board:

  1. Public and Private Support: Unwavering support for the CEO, both internally and externally, until a decision is made to replace the CEO.

  2. Availability: Board members should be actively involved in the business, dedicating an agreed-upon amount of time to support the CEO and the company.

  3. Strategic Advice: Board members should provide strategic counsel based on their experience, asking insightful questions and providing guidance tailored to the specific needs of the company.

  4. Contacts and Relationships: CEOs should leverage the board's network of contacts and relationships, which can provide valuable connections and insights.

  5. Governance: Board members should ensure strong financial and legal discipline, helping to establish a solid operational culture.

  6. Balance and Harmony: A high-functioning board should maintain a healthy balance of perspectives and opinions, fostering an environment where all voices can be heard.

Board Accountability and Pattern Matching

Boards play a crucial role in holding CEOs accountable and providing a broader perspective on business challenges. However, the sources caution against excessive reliance on “pattern matching” – applying experiences from other companies without considering the unique circumstances of the current situation. Board advice based on pattern matching without a clear rationale is of limited value.

Leveraging the Board’s Social Capital

CEOs should actively utilize their board’s social capital by providing a structured approach to introductions and connections. This could involve creating a list of desired contacts and allowing board members to identify their connections.

Chapter 12: Trying New Things

Experimenting with Board Communication

This chapter encourages CEOs to adopt a flexible and experimental approach to board communication. It suggests that there are no rigid rules for how board interactions should occur and that CEOs should feel empowered to try different methods to improve communication and board effectiveness.

Flexibility and Innovation

The sources emphasize that CEOs should be open to trying new things and tailoring their communication style to the specific needs and preferences of their board members.

Continuous Learning and Improvement

CEOs should view board communication as an ongoing learning process and work collaboratively with their lead director to find the most effective ways to engage the board and leverage its expertise.

Examples of Experimentation

The chapter does not provide specific examples of board communication experiments, but it suggests that CEOs can explore various aspects of communication, including:

Learning from Others

The chapter highlights the importance of learning from other CEOs and board members to continuously improve board communication and effectiveness.

Seeking External Perspectives

CEOs should actively seek insights and advice from experienced individuals outside of their company to gain new perspectives on board management and communication.

Benchmarking Best Practices

CEOs can benefit from learning about the practices and experiences of other successful companies, identifying strategies and techniques that can be adapted to their own board interactions.

Collaboration with the Lead Director

CEOs should work closely with their lead director to identify areas for improvement and implement changes to enhance board communication and overall board performance.

Chapter 13: Communication Conflicts

Emotion Versus Logic

Within the context of startup boards, conflicts often arise from the clash between emotional and logical considerations. Entrepreneurs, deeply invested in their ventures, tend to be emotionally attached to their companies and ideas. In contrast, investors, while seeking financial returns, often approach decision-making from a primarily logical and analytical perspective.

This emotional investment of the entrepreneur can lead to resistance to feedback or suggestions, particularly if they perceive these as threats to their vision or control. Conversely, investors might struggle to fully appreciate the emotional nuances or non-quantifiable aspects of the business.

Successfully navigating these conflicts requires both parties to acknowledge and respect these different perspectives. Entrepreneurs need to recognize the value of objective analysis and be open to constructive criticism, while investors should try to understand the entrepreneur's passion and the emotional motivations driving their decisions.

Reciprocation

The concept of reciprocation, a powerful psychological principle, significantly influences the dynamics within board communications. This principle suggests that individuals feel obligated to return favors or concessions, creating a sense of indebtedness.

In the context of board interactions, reciprocation can manifest in various ways. For example, if an investor consistently provides support, offers helpful connections, or advocates for the entrepreneur's vision, the entrepreneur might feel compelled to reciprocate by being more receptive to their suggestions or accommodating their requests. Similarly, if an entrepreneur openly shares information, seeks advice, and demonstrates vulnerability, investors might feel more inclined to reciprocate by being more patient, understanding, and supportive.

However, this principle can also lead to unhealthy dynamics if exploited or if it creates an imbalance of power. Both entrepreneurs and investors should be mindful of reciprocation and ensure that their actions are driven by genuine intentions rather than a sense of obligation.

Groupthink

Groupthink, a phenomenon where the desire for harmony or conformity within a group overrides critical thinking and independent decision-making, poses a significant risk to board effectiveness. When groupthink takes hold, board members might hesitate to express dissenting opinions, challenge assumptions, or raise concerns, potentially leading to poor decisions.

Several factors can contribute to groupthink, including:

Mitigating groupthink requires fostering a board culture that encourages open dialogue, welcomes diverse viewpoints, and values constructive dissent. Encouraging individual board members to prepare independently, share their perspectives candidly, and challenge assumptions can help prevent groupthink.

Your VC Firm Invested in a Competitor

A particularly challenging conflict arises when a VC firm represented on a startup's board invests in a competitor. This situation presents a significant conflict of interest, as the VC firm now has a financial stake in the success of two companies vying for the same market.

The implications of this conflict can be substantial:

Addressing this conflict requires transparency, clear communication, and potentially structural changes. The VC firm should disclose the conflict to both companies and potentially recuse themselves from certain discussions or decisions. In some cases, the VC might need to step down from one of the boards to avoid a conflict.

What Happens If Your Board Member Ends Up on the Board of Your Competition?

The sources don't directly address the specific scenario where a board member joins the board of a competitor.

Walking Dead VC Partner

A "walking dead" VC partner refers to a situation where a VC partner leaves their firm but remains on the board of the startup. This situation can create uncertainty and potentially disrupt board dynamics.

The implications of this scenario depend on the circumstances of the VC's departure and their ongoing relationship with their former firm:

The startup should assess the situation, communicate with the VC, and determine whether their continued presence on the board is beneficial.

Walking Dead VC Firms

A "walking dead" VC firm describes a firm that is no longer actively investing but still manages existing portfolio companies. This situation can impact the level of support and resources available to the startup.

The implications for the startup include:

The startup should assess the situation, communicate with the VC firm, and explore alternative sources of support and resources if necessary.

Interpersonal Conflict between Board Members and Management

Interpersonal conflicts between board members and management can arise due to personality clashes, differences in opinions, or perceived power imbalances. These conflicts can be detrimental to board effectiveness, as they can hinder communication, create distrust, and impede decision-making.

Addressing interpersonal conflicts requires:

It All Comes Down to Trust

Ultimately, effective board communication hinges on a foundation of trust. Trust enables open and honest dialogue, facilitates constructive feedback, and allows for productive conflict resolution. Building trust takes time and effort, requiring:

When trust is eroded, it can be difficult to repair and can significantly damage board dynamics. Addressing trust issues promptly and openly is crucial to restoring a healthy and productive board relationship.

Chapter 14: CEO Transitions

Situations That Lead to a CEO Change

CEO transitions are a common occurrence in startups, often driven by the need for a leader with different skills and experiences as the company evolves. Several factors can contribute to these transitions.

Scale Up with Growth, or You Will Get Scaled Out

Startups that fail to scale effectively as they grow often face CEO transitions. According to Harvard Business School professor Noam Wasserman, a significant percentage of founders are replaced as CEOs within a few years. Professor Steven Kaplan of the University of Chicago Graduate School of Business found similar results, with only 49 percent of VC-backed founders remaining CEO until the IPO. The sources emphasize that as companies mature, the required CEO skill set shifts from product vision and early-stage execution to organizational building, team management, and operational excellence.

Founders who struggle to adapt to these changing demands may be replaced with CEOs who possess the necessary experience and expertise to lead the company through its next phase of growth. It's important for founders to recognize that investors prioritize the company's success over individual leadership.

Why Boards Fire CEOs

Boards typically fire CEOs for a variety of reasons, including:

Planning for Healthy Transitions

CEOs and boards should proactively plan for transitions, ensuring a smooth handover of responsibilities. This can involve identifying and grooming potential successors and establishing a clear process for evaluating CEO performance and making transition decisions.

Board Transitions

Changes in board composition can also occur, driven by factors like:

Getting Rid of the Entire Board

In some cases, founders or major investors may choose to replace the entire board, particularly if they feel the current board is not aligned with the company's vision or is hindering its progress. While this is an extreme measure, it can be necessary to regain control and set a new direction for the company.

The sources provide an example of Mark Pincus, founder of Zynga, regaining control of the company by replacing the entire board. This drastic action highlights the tension that can arise between founders and investors, particularly when there are disagreements about strategy and execution.

Chapter 15: Financings

The Role of the Board in Financing Transactions

The sources describe how the dynamics surrounding a financing can vary significantly, but the board of directors always plays a crucial role. VC board members in particular can play an active role in raising capital, identifying potential investors, and negotiating terms. They also hold an essential governance role.

Formality and Legal Considerations

Each financing involves formal processes and legal documentation, such as a stock purchase agreement, which requires negotiation and signing. The board must approve formal resolutions associated with the financing, and numerous documents require each board member's signature.

Importance of Experienced Legal Counsel

The sources emphasize the importance of having experienced legal counsel specializing in startup financings. A competent lawyer can guide the company through the complexities of the process, ensuring compliance and protecting its interests.

Different Financing Scenarios and Board Responsibilities

The sources outline several financing situations and the unique responsibilities of the board in each:

New Investor-Led Round

When a new investor leads the financing round, the board's duties are relatively straightforward. The lack of prior involvement from the new investor minimizes potential conflicts of interest. While there are standard resolutions associated with the financing, these are typically uncontroversial.

Formal Board Procedures and Documentation

Even in a straightforward financing scenario, maintaining formality is crucial. A board meeting should be convened, attendance recorded, motions presented, and votes taken. The resulting resolutions should be documented in the meeting minutes.

Inside-Led Round

An inside-led round, where an existing investor leads the financing, introduces potential conflicts of interest.

Board's Role in Protecting Shareholder Interests

The board has a responsibility to ensure the terms of the financing are fair to all shareholders, not just the existing investors leading the round. This includes:

Down Round and Rights Offering

A down round, where a company raises capital at a lower valuation than in previous rounds, presents unique challenges for the board.

Board's Duty in Difficult Circumstances

The board's fiduciary duty to all shareholders becomes even more critical in a down round. The board must ensure the financing is necessary and that the terms are the best available.

Rights Offering Considerations

A rights offering, which allows existing shareholders to purchase new shares at a discounted price, is often used in a down round. The board must carefully consider the structure of the rights offering to balance the interests of existing shareholders with the need to attract new capital.

Addressing Potential Conflicts

The sources highlight that potential conflicts of interest, especially those involving VCs who may prioritize their own returns over other shareholders, can arise in a down round.

How Involved Should VCs Be in Financings?

The sources raise the question of the appropriate level of involvement for VCs in financing transactions.

Balancing Active Participation with Governance

While VCs can provide valuable support in fundraising, it's important to maintain a balance between their active participation and their governance role.

Transparency and Objectivity

To maintain transparency and objectivity, it is crucial to:

The sources do not explicitly provide examples of situations where conflicts arose from a VC’s involvement in a financing, nor do they offer advice on how to resolve those conflicts.

Chapter 16: Selling a Company

Confidentiality

When selling a company, confidentiality is paramount. The sources emphasize the need to limit the number of people involved in the process and to use code names when referring to the potential buyer. This helps prevent leaks that could jeopardize the deal or damage the company's reputation.

Fiduciary Responsibility

The board has a fiduciary responsibility to all shareholders. This means they must act in the best interests of all shareholders, not just themselves or a specific group. This responsibility becomes particularly challenging in an acquisition scenario where different classes of investors may receive different considerations.

Venture capitalists (VCs), who often sit on startup boards, face a dual fiduciary duty. They have a responsibility to the company's shareholders, but also to their firm’s limited partners. In many cases, these duties align, but in some cases, they can be in conflict. For example, a deal structure that benefits the VC’s fund may not be in the best interests of all shareholders.

The sources suggest that reputable VCs prioritize the interests of creditors and employees above their own in these situations. They are more likely to support a deal that pays off creditors and provides for employees, even if it means shareholders receive fewer proceeds. This is because VCs play for the long term and understand that prioritizing stakeholders in a difficult situation can enhance their reputation and benefit their future portfolio companies.

Your Lawyer’s Role

The sources highlight the importance of having an experienced lawyer involved in the sale process. They list several key responsibilities of the lawyer, including:

Acquihire

An "acquihire" occurs when a company is acquired primarily for its talent rather than its products or services. In these situations, the acquiring company may shut down the acquired company’s operations and integrate its employees into its existing workforce.

The sources do not provide further information on acquihires.

Carve-Outs and 280G

The sources do not provide information on carve-outs, 280G or shareholder representative conflict.

Chapter 17: Going Public

Process

This chapter emphasizes the significance of the board's role as a company prepares for an Initial Public Offering (IPO). The responsibilities of the board become more formal, with increased workload, a heightened presence of legal counsel, and a shift towards more structured committee work.

Transition to a Public Company

The transition from a private to a public company is a substantial undertaking. While the book does not cover the full scope of public company director responsibilities, it highlights key areas of focus for directors during the IPO process.

CEO's Role in Preparing for an IPO

Rally Software CEO, Tim Miller, who took his company public, provides insights on how CEOs should approach board interactions during the IPO process.

Transparency and Vulnerability

CEOs should openly share challenges and vulnerabilities with the board, seeking feedback and guidance rather than presenting a filtered view of the situation.

Framing Issues for the Board

Miller advises CEOs to clearly articulate their needs and the level of support required from the board. This could range from seeking help with unfamiliar problems, engaging in dialogue about potential solutions, or simply informing the board of decisions already made.

Leveraging Board Experience

CEOs should leverage the board's collective experience, particularly when encountering challenges for the first time. Boards can provide valuable insights and perspectives based on their past experiences with similar situations.

Committees

This section highlights the role of board committees in the IPO process.

Increased Formality

The sources note that board committee work transitions from informal to formal as a company prepares to go public. Committees play a crucial role in ensuring compliance with regulatory requirements and best practices.

Examples of Key Committees

Confidentiality

This section emphasizes the importance of confidentiality during the IPO process.

Sensitive Information

The IPO process involves handling sensitive financial and operational information. Directors must maintain strict confidentiality to protect the company and its shareholders.

Insider Trading

Directors are considered insiders and are subject to regulations regarding insider trading. They must avoid buying or selling company stock based on non-public information obtained during the IPO process.

Insider Status

This section focuses on the legal and ethical implications of being an insider during the IPO process.

Responsibilities and Restrictions

Directors, as insiders, have specific responsibilities and restrictions related to their interactions with company information and stock trading. They must act in accordance with insider trading regulations and prioritize the company's interests.

VCs on Public-Company Boards

The chapter concludes by discussing the role of venture capitalists (VCs) on public company boards.

Shifting Dynamics

As a company goes public, the dynamics between VCs and the board may change. The company may attract new investors and board members with public company experience, leading to a shift in influence and perspectives.

Long-Term vs. Short-Term Focus

VCs, traditionally focused on long-term growth, may face pressure from public market investors who prioritize short-term performance. This can create tension and require careful navigation to balance competing interests.

Board Composition and Expertise

The sources suggest that the board's composition may evolve as a company transitions to a public entity. The need for specific expertise, such as public company financial reporting and regulatory compliance, may lead to the addition of independent directors with relevant experience.

Chapter 18: Going Out of Business

The Zone of Insolvency

When a company faces financial difficulties and approaches insolvency, the board's responsibilities and legal duties can shift significantly. It's crucial to understand the concept of the "zone of insolvency" and the implications it has for board decisions and potential liabilities.

Defining the Zone of Insolvency

A company is generally considered to be in the zone of insolvency when its liabilities exceed its assets, it lacks sufficient cash to meet its obligations, or its cash reserves are unreasonably low. Determining insolvency requires careful interpretation and consideration of various factors, and it cannot be solely based on a single financial metric.

Impact of Insolvency on Board Duties

In some jurisdictions, entering the zone of insolvency triggers additional duties and liabilities for the board of directors. Failing to recognize and adhere to these heightened responsibilities can lead to personal liability for board members.

Importance of Frequent Board Meetings and Legal Counsel

When a company is in or approaching insolvency, the board should meet frequently, sometimes even daily, to monitor the company's financial health and make critical decisions. It's crucial to have legal counsel present during these meetings to document discussions and decisions properly.

Responsibility to Creditors

While a board typically owes fiduciary duties primarily to shareholders, its responsibilities towards creditors can change when a company enters the zone of insolvency. Some states impose a fiduciary duty to all "stakeholders" in such situations, including creditors and employees.

Considering Stakeholder Interests

When facing insolvency, the board must balance the interests of all stakeholders, not just shareholders. This involves making difficult decisions, such as choosing between investing in business operations or prioritizing creditor payments.

Preserving Assets and Paying Off Creditors

If the board believes that continued investment in the business can increase its value, it may choose to prioritize hiring, research and development, or sales efforts. These decisions should be documented thoroughly. However, if the board is uncertain about the company's future prospects, it should focus on preserving assets to ensure creditors can be paid.

Responsibility to Shareholders

Although the board's duties to shareholders do not technically change during insolvency, the reality is that when a company's equity value approaches zero, the priority shifts towards paying off creditors. In practice, creditor interests take precedence over shareholder interests in these situations.

VCs and Shareholder Interests

Venture capitalists (VCs) sitting on the boards of insolvent companies face a potential conflict of interest, as they have fiduciary duties to both the company and their firm's limited partners. Reputable VCs generally prioritize creditor and employee interests over their own financial interests in these cases, supporting outcomes that favor creditors and employees even if it means shareholders, including themselves, receive no proceeds.

Role of Venture Banks

Venture banks, which specialize in lending to high-risk companies backed by VC investments, also play a role in the insolvency scenario. VCs often prioritize maintaining good relationships with venture banks to ensure continued access to financing for future portfolio companies. This can influence decisions regarding creditor repayment priorities.

Liability

Board members are typically protected from personal liability if they act in accordance with their fiduciary duties. However, exceptions exist, particularly during insolvency proceedings. It's paramount to have competent legal counsel to guide the board and mitigate potential liabilities.

State Law and Personal Liability

Personal liability issues for board members are governed by state law, which can vary significantly. Depending on the state of incorporation and operation, the board may need to comply with multiple sets of regulations. Additionally, foreign operations or international considerations further complicate the legal landscape.

Potential Liabilities for Mismanagement

Mishandling a wind-down process can expose board members to personal liability for various actions, such as unpaid employee wages, improper layoffs, or prioritizing employee severance over creditor payments.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy allows a company to reorganize its finances, restructure its debts, and continue operating under court supervision. It provides an opportunity for the business to survive and potentially emerge from financial distress.

Purpose and Process

The Chapter 11 process involves developing a reorganization plan, negotiating with creditors, and seeking court approval for the plan. While Chapter 11 can be a viable option for some companies, it's often complex, expensive, and time-consuming.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a liquidation process where a company's assets are sold under court supervision to pay off creditors. The company ceases to exist after a Chapter 7 filing.

Initiation and Consequences

Chapter 7 bankruptcy can be initiated voluntarily by the board or involuntarily by creditors. It is generally considered a last resort option, often resulting in significant financial losses for investors and a negative impact on board member reputations.

Assignment for the Benefit of Creditors

An assignment for the benefit of creditors is a process where a company transfers its assets to a third party, known as an assignee, who liquidates the assets and distributes the proceeds to creditors. This approach offers a potentially faster and less expensive alternative to formal bankruptcy proceedings.

Advantages and Considerations

While an assignment can be more efficient than bankruptcy, it may not provide the same level of creditor protection or legal oversight. It's crucial to carefully evaluate the specific circumstances and legal implications before pursuing this option.